Pharma event risk hits investors

Mon Apr 28, 2014 9:14am EDT
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(This story originally appeared on IFR, a Thomson Reuters publication)

By Danielle Robinson

NEW YORK, April 28 (IFR) - The heightened level of event risk in the pharmaceutical sector was demonstrated when Allergan, the pharma giant behind Botox, saw its bonds plunge some 10 price points on news that activist investor William Ackman and Valeant Pharmaceuticals International are spearheading an attempted hostile takeover of the company.

Moody's and Fitch both moved Allergan's rating outlook to negative, warning that a successful takeover by the Canadian "serial acquirer" and Single B rated Valeant would crush Allergan's A3/A+ investment-grade credit rating.

Allergan's 2.8% March 2023s plummeted on Tuesday to 84.58 in the secondary market on the news, where they were quoted at 225bp bid/175bp offer over Treasuries - sharply off from 94.53 and 80bp/70bp bid/ask the day before.

Although Allergan quickly adopted a "poison pill" defence in an attempt to prevent a takeover, its spreads failed to return to their former levels, with the 2023s at 200bp on Thursday.

Like many bonds of the best-rated pharmas, Allergan's US$2bn of outstanding debt does not have change-of-control covenants, leaving them open to being subordinated to secured debt of an acquirer like Valeant and a rapid tumble into junk-bond status.

Even if the acquisition is not successful, the name has now been tainted by the agitating presence of Ackman.

"Negative ratings pressure would stem from significant shareholder-friendly actions if Allergan stays independent, including leveraged share repurchases or special dividends," said Fitch pharma analyst Michael Zbinovec.   Continued...